"To get rich is glorious." -- Deng Xiaoping. This is perhaps the smartest thing ever uttered by a member of the Communist Party.

Wednesday, August 27, 2008

Friedman again

Thomas Friedman follows up on his most recent column in praise of China with an even more fulsome piece:

China did not build the magnificent $43 billion infrastructure for these games, or put on the unparalleled opening and closing ceremonies, simply by the dumb luck of discovering oil. No, it was the culmination of seven years of national investment, planning, concentrated state power, national mobilization and hard work.

...As I sat in my seat at the Bird’s Nest, watching thousands of Chinese dancers, drummers, singers and acrobats on stilts perform their magic at the closing ceremony, I couldn’t help but reflect on how China and America have spent the last seven years: China has been preparing for the Olympics; we’ve been preparing for Al Qaeda. They’ve been building better stadiums, subways, airports, roads and parks. And we’ve been building better metal detectors, armored Humvees and pilotless drones.

The difference is starting to show. Just compare arriving at La Guardia’s dumpy terminal in New York City and driving through the crumbling infrastructure into Manhattan with arriving at Shanghai’s sleek airport and taking the 220-mile-per-hour magnetic levitation train, which uses electromagnetic propulsion instead of steel wheels and tracks, to get to town in a blink.

Then ask yourself: Who is living in the third world country?

Yes, if you drive an hour out of Beijing, you meet the vast dirt-poor third world of China. But here’s what’s new: The rich parts of China, the modern parts of Beijing or Shanghai or Dalian, are now more state of the art than rich America. The buildings are architecturally more interesting, the wireless networks more sophisticated, the roads and trains more efficient and nicer. And, I repeat, they did not get all this by discovering oil. They got it by digging inside themselves.

Reading this I can almost picture Friedman, riding on the maglev train in childlike wonder and concluding that the U.S. needs one of its own. So, tasked with writing two columns per week Friedman gets busy writing about how China has all this cool stuff and if we don't get some as well then our goose is cooked.

Please.

Let me provide you with another narrative about China's rise perhaps worth considering. China, a developing country, spends $43 billion conducting a spectacle to add to its prestige at the same time as millions of its people languish in a hand to mouth existence. Indeed, according to the CIA factbook over 50 million Chinese live on $125 per year or less. China's GDP per capita at $5,300 is less than half that of Romania.

In fairness, some of this spending will help promote future growth. Improved roads, airports, etc. can help bolster commerce and reduce the ranks of the poor and unemployed. But what is the famed Bird's Nest stadium going to do for them? Or the aquatic center? As Victor Matheson, an economics professor at Holy Cross, points out:

Expensive infrastructure projects undertaken for the Olympics also generally contribute little to long-run economic growth. While the construction of modern airports, highways, and transit systems are vital for economic development, the specialized sports infrastructure required to host an Olympic Games cannot easily be converted to other uses. The so-called Water Cube, the site of Michael Phelps's golden achievements, is an architectural and technological wonder. But after the closing ceremony, Beijing will have little use for a state-of-the-art swimming facility that seats 17,000.

Beijing will join good company in wondering what to do with its beautiful but empty venues. Most of the 10 gleaming new stadiums built in South Korea for the 2002 World Cup sit unused today, and Australian economists at Monash University suggest that the "redirection of public money into relatively unproductive infrastructure such as equestrian centers and man-made rapids" has since reduced public consumption by $1.8 billion (in US currency).

Unfortunately, while the facilities may sit unused, the debt accumulated to build these monuments still must be paid. Montreal finally paid off the last of its debts from the 1976 Summer Games just two years ago.

It's one thing if you are a first-world country and decide to host silly indulgences like the Olympics, but it's another when your people lack basic necessities. This is not something to be praised, it is to be condemned.

We must also examine how China was able to build so many of these projects so rapidly. It certainly helps when there is little respect for property rights and the government can order people off their land and bulldoze everything to make way for the latest project. Try that in New York City and see how far you get -- and that's a good thing.

Even with the cost advantage of being able to readily cast people aside to complete the vision of government planners there is still evidence that some of these projects are boondoggles. Just look at the maglev train that Friedman is so in awe of through the eyes of Henry Blodget:

For gawkers and other one-time users, the maglev is the equivalent of an adult theme-park ride: cheap, thrilling, and fodder for cocktail parties. For those who just want to get to or from the airport, however, it leaves much to be desired.

First, there's the problem that the maglev doesn't really run from Pudong to Shanghai, but from Pudong to the end of one of Shanghai's subway lines, aka the burbs. So, to get to Shanghai proper, you have to schlep your bags again, either into the subway or into a taxi like the one you could have grabbed at the airport.

Then, there's cost. Thanks to China's polarized pricing system—one price for goods and services sold to foreigners and other rich folks, and another for everything else—the $6 one-way ticket is not a deal. When you throw in the added schlepping at both ends, the maglev loses in cost, convenience, and possibly even time.

These are two of the reasons the train is running at less than half of capacity, and, probably, hemorrhaging money. The maglev cost $1.2 billion or more to build, which means the system chews through north of $60 million a year in capital costs alone. Assuming 12,000 passengers per day (my estimate), the maglev generates about $27 million of revenue per year, or less than half its capital costs, much less its total costs. It is not clear who is absorbing these losses, China or Transrapid, but, either way, someone's taking a bath.

Look, if Freidman wants to simply argue that we could use better infrastructure in this country, fine. It's an argument that I have some sympathy for. For example I find it endlessly frustrating that it has been almost 7 years since the Sept. 11 attacks and the WTC site has yet to be rebuilt, owing chiefly to endless bureaucracy and legal wrangling. There has been growing experimentation with privately financed infrastructure that I find interesting and perhaps that Friedman would care to further expound upon. If there are examples of creative infrastructure financing and construction in other democratic countries I would be interested to hear them. But from authoritarian China we have little to learn.